tv Options Action CNBC February 5, 2012 6:00am-6:30am EST
this is "options action." your front row seat to the smart money. tonight bank for your bucks. how would you like to make 30 times your money. in bank of america in three months. it's a bankable trade in a jobs recovery that you won't want to miss. plus call it a disney discount. we've got you a deal for just under $3. it is our options trade ahead of earnings. we'll show you how you can make money too. and twice as nice. dan and mike nailed both green mountain and amazon last week. now they'll give you their next move. the action begins right now. live from the nasdaq market site, i'm melissa lee. these are the traders here in times square. say it loud, say it proud. america is back. lowest unemployment rate since january 2009.
pushing the stocks to their highest levels in three years. that makes our task tonight clear. that is to give you option strategies to play the recovery. the story of the day huge rallies in financials as well as technology. couple of key 52-week highs here. apple for one. microsoft for another. >> there's been money in these all year long. then you get the piece of news about facebook's valuation earlier in the week. there's names that are benefitting from this from a valuation's standpoint. and you're seeing a lot about tech and the prospects for an economic recovery. echoed by the unemployment data this morning. if you saw any signs of people willing to go away from the position themselves in financials and technologies. >> we've actually seen that for the last couple weeks. some of the tobacco stocks have not done well. mcdonald's is stuck in in rut. bonds got killed.
a lot of that money is going to go into equities. there's also good news. correlation is no longer at one. we have some stocks that are up a ton. some are down a ton. it's easy to look at names like microsoft and think it's dragged higher by the overall market. but correlation is no longer one. that's a good thing for the stock market. one other thing. it's almost like every stock investor had the lightbulb go off over their head. it rallied in the afternoon. it's like people say hey, it's cheap. i want to buy protection. if the worst thing in the world happened, if the puts are worthless, that's fine. >> no question. that stock market is a sign of a healthy market. risk on, risk off like the course of the year, that is not a healthy situation. it's hard to make intelligent investment decisions. one thing i would point out about the options market, that it seems to me that options dealers are basically drawing the line in the sand. the cost of ensuring your
portfolio is bottoming out. the way we recognize that, the spread between how volatile the market is which is not at all volatile is about as wide as that spread has been in a very long time. right now the market really is just melting up but the options market suggesting downside. >> you used the term healthy. i looked this week. there was crazy price action in single stock names. we're going to talk about green mountain. that was up 25%. seagate was up 25%. amazon down 10% at one point. there's a lot of moves. i don't think it's that normal. so to me if i'm long it almost feels like it's giddy action. >> whirlpool was through the roof this week. >> but whirlpool, seagate they trade at very low multiples. any type of good news. other thing, whirlpool was a stock all but left for dead. people betting on the short side there and a pop. all of a sudden the numbers are better than expected.
>> whether it's a fundamentally rise we're seeing in the markets, we did see a lot of action today. 4% gains in citi. bank of america. for 2012 it's been a winning sector. >> it's been crazy since about a week before the end of the year. bank of america is up 40% just this year alone. in a lot of ways, when you look at the charts, they are approaching levels for instance when we fell off a cliff, the market fell off a cliff in july. now we're getting to a point where bank of america is back to $8. morgan stanley is through it. jpmorgan, citi, it's like crisis time is over. >> so what are we looking at this week? >> i want to look the other way. so bank of america is a stock that people keep buying hand over fist. it's a single dollar name and people can get big in it. i want to look out a few months and say to myself this 40% gain, maybe there's a lot of good news in the stock going forward.
i'm trying to figure out inventive structures that don't cost me a heck of a lot of money that will play for a retracement. >> dan is using what a called a one by two put spread. it is a bearish bet. one we haven't used in awhile. let's review. you buy one put then offset by selling two lower strike puts of the same expiration. you want to go just above the strike of the puts. since you are short more puts than long, you may have to buy lower. what is the trade here? >> that last point is the key one. you are short more options than you're long. and there's risk to it. this is not for everybody. i want to look out to may expiration. today when the stock was 780, i bought the one by two put spread. i paid a nickel for it. i bought one of the may 7 puts for 40 cents and sold two of the may 6 puts for a total of about 35 cents.
that's my net debit of five cents. my max gain is i can make up to 95 cents. between $6 and $5 on may expiration, the payoff trails off. really here's the deal. my worst case scenario is if the stock is six or below, i put the stock at $6. but i've made 95 cents. so my risk really is i'm long essentially $5.05. that's down 35% from current levels. i like that reward. >> dan has done a really good job putting some bearish bets on financials. we saw that at the beginning of the year. the only thing about this is that with a may one by two put spread, the sensitivity is probably more ripe now to increases in volatility than a downward move in the stock. i find it interesting that you're finally willing to sell a downward spiral. you thought that was crazy the first 30 days of the year. you know, i would simply say
that right now is probably not the time i would be net short. volatility on balance. and this trade does get you there. >> volatility is not important for a retail trigger. i think this makes all the sense in the worlt. there's a huge swath where it's profitable. and you don't really care. it's going to cost you a nickel. i think this makes all the sense in the world. i'd be looking to buy it. >> that's a good point. and the last word is if you bought bank of america at 5 or 6, bought any point lower than here, this is good cheap protection if you want to think about it that way. >> let's hit the stocks versus options button. shorting bank of america might be tempting but is slightly insane. why? you have eight bucks of up side. a 30 to one payout. and worst case scenario, he could buy for about six bucks. he wouldn't begin to see losses until the stock trade below $5. let's move on to our next trade now. disney. the media giant reports earnings after the bell on tuesday. the stock has moved an average of 6% on the last four earnings
periods. where's it going right now? let's call to the charts with the man who still cries when he watches "bambi." carter? >> good one. so couple charts on disney. the first is this. it tops the exact same day may 2nd as the s&p and the dow. it bottoms on october 4 and now is recovered. unlike the dow and s&p, it's back to the high. disney is not quite there and we think it's headed there. closed today at 40. take a look at the same chart with a different set of lines drawn. same time frame. but rather than showing the trend line that it's made since the low, it shows what many people like to look for which is the head and shoulders top or bottom. and then allow to put in perspective where we've come from, major handle close at 40 today. so nice upside on its earnings
next week. >> all right. upside pop says carter braxton worth. do you agree, mike, on a fundamental basis? >> on a fundamental basis, the valuation for this name is fairly reasonable. we're trading about average for the stock. it's trading 8.7 times enterprise value which is also right in line. maybe cheaper than they usually trade. the economic data we're getting is strong. that should be strong for their core businesses. most people think of them as a parks business and movie business. cable is actually their primary business. they own the premiere space in cable which is espn. unfortunately, not cnbc. it is one of the situations where obviously they benefit from an economic recovery. this is a stock that's moved around quite a lot. up 30% from its $30 or just about low. one of the things i would like to do here is hedge myself to the downside a bit. i think i've rye flekted that concern. >> all right. so what are you going to do exactly? >> this time i'm going to keep it pretty easy. i'm looking to buy the june 40 call.
normally we don't look at strategies this simple. we usually look to fund them. but the situation here is simply that you're going to spend less than 5% of the premium. i would look to spread out of it. and it's going to mitigate any down side. like i said, up 30% in a relatively short period of time. just a way to hedge. >> just buying calls. mike just buys calls. no need for that playbook. >> it's cup and handle. how can you go against that? >> teacup. >> and a smoothing mechanism there. the truth is mike just laid out a valuation case. the trend is higher in this name. since it gapped up in the first day of the year above resistance, it's based above that. i think the chart looks fantastic. and the vols are cheap. i like mike's idea of buying a call. you get the max highs and spread it out. >> i think the point there is vols are cheap.
options are inexpensive. it makes sense to buy one. one thing you have to do. if disney ends up wallowing in that range, then you can't just let this call erode away. you've got to sell it even though the trade hasn't worked. more fun than a ride on space mountain. >> stocks versus options. for this trade that's true. why is that? 100 shares of disney will set you back about four grand. that's more than a cost of a trip to the magic kingdom. mike's call purchase only costs $245 and that is the tradeoff there. we'll see carter later on in the show. don't worry. got a question, send us an e-mail. we'll answer it right after the show on our website. "options action".cnbc.com. we also post trade updates there as well. so you got to check this out. here's what's next. talk about brewing profits in just a week. dan's tripled his money since his bullish bet on green mountain coffee and there's more left in the trade. find out how he did it when
"options action" returns. time for pump up the volume. the names that were heating up the sizzle index this week. this chemical manufacturer is named for the peachy state. they're a growing name in the vinyl and chlorine business. and now everyone's in the pool. options traders made a splash betting the bidding will buoy the stock price. who is it? the answer when "options action" returns.
where were options traders pumping up the volume this week? georgia gulf. at one point call activity was 19 times its average daily volume. welcome back to "options action." time for the upside call. we take a look back on our winning trades. last week dan woke up, smelled the coffee and said time to get back into green mountain. he was able to brew up instant profits with a trade that put time on his side. here's how he did it. on "options action," it's a rule that has passed the test of time. risk less, make more. that's exactly what dan did with his bullish bet on green mountain coffee roasters. thought shares break out on earnings. >> netflix had a massive week on strong earnings that were kind of unexpected. green mountain could set up similarly. >> but 100 shares, that cost $5300.
so to spend less, dan instead bought the march 60 strike call for $3.05. he needs it to trade by more of the cost of the trade or $63.50. by march expiration. but three bucks. if we want to spend that dough on a cup of joe, we go here. show us how to do this for less. i want to sell the call. >> smooth brew. so to spend less, dan sold the green mountain weekly 60 strike call for $1.35 and created a call calendar. but he also made making money easier and here's how. between the $3.05 and the $1.35 he collected. dan reduced the cost of his trade to a buck 70. now instead of needing to trade above $63.05 to make money, he
can see profits if it's above $1.70 he spent on the trade or above $61.70 by march expiration. but it gets even better. that's because the value will decrease faster than the longer dated call that he bought. allowing dan to pocket the difference and do something that would make any alchemist green with envy. turn time into money. but there is a tradeoff. by selling that near-dated call. dan needs green mountain stock to stay just below the shorter dated call by the first expiration or below $60. but above that strike of the call in the second expiration by more of the cost of the trade or in this case above $61.70. and since the time of the trade, they've brewed up quick profits. soaring 30%. making dan a big winner.
now options action fans are on a caffeine high. with the clock ticking, they only want to know one thing. what will dan do now. right before we answer that question, let's see how much money was made. you're at about 26%. that's good. dan's call calendar can be sold today for 2 $.60. a return of 52%. now, this might be a case of being too right on the trade. >> it's interesting since we laid out the trade on friday, the implied move ticked up a bit. by the time you got the trade on, you almost had to a ju the strike. so it was a tough one. for me what i did was i took the modest gain. when you look at how much you could have made if you were long on the stock, i didn't have the conviction to buy the stock. it was a controversial name. i like the way it set up. not a big gain. >> if you had to put a trade back on green mountain, would
you go the opposite route? down at this point? >> the stock held it. the short interest was so high. this is what pushed me over the line. 22% going in. the shorts are still covering this. in a lot of ways i think it's going to stay controversial. >> as we said at the top, we had two winners from last week. it's time for the upside call times two. that involves khouw and carter's bearish bet on amazon. 165 put spread for 390. that can be sold today for about $60. call it an amazing amazon short. is there more pain to come for this? call back to the charts and carter who got us into this trade in the first place. >> stay with it. amazon broke and has rallied back actually. even shorted again. >> do you agree? >> i absolutely agree. i've expressed a lot of skepticism.
we don't want to stay long. which is rapidly decaying. you had chance to rapidly trade this after earnings. what i would look to do is roll out my bearish bet here. >> carter, our thanks to you as always. >> if you want updates on our trades, follow us on twitter. dan posts regular tweets of his trades as well. coming up next, options traders love playing the odds, but could a giants super bowl win be a loss for las vegas? we'll tell you why when "options action" comes right back.
that music can only mean one thing. super bowl sunday, the time of year where growing men are reduced to tears because the home team fails to win by more than three and a half points. but they may have company because a giant win could be a big loss for vegas casinos. courtney's got the story. >> here at caesar's they are starting to place on the super bowl. loves the crowds that the super bowl brings in, it's less than thrilled about the matchup
between the giants and patriots. four years ago when giants won, las vegas sports books suffered a loss. if the giants bring bad to vegas, the patriots do just the opposite. in fact when the patriots won in 2004 and 2005, vegas had two of its best win percentages. the odds on the giants are now to win the game. when the record was 7-7, the odds were 80-1. that means that bet could make you an $8,000 payout. we talked to some places that aren't concerned about the losses. caesar's isn't concerned. they say some sports books that are. they wouldn't name those names specifically. >> all right courtney reagan on the strip. we've got to talk about the casin
casinos. the game is important to all of us. it is actually just turnaround overall. given how many 52-week highs they set this week. >> no question. one day this week we saw four of the top five actions were upside calls. as you point out, it isn't driven by the super bowl. it's by what happens overseas for sure. really those kinds of numbers, couple million bucks, 10 million, 20 million those are inconsequential. >> it was a tale of two casinos, >> given wynns results. a wynn was down 5% today. >> wynn missed estimates which was a problem for them. these are the two bs names. and this is where i'd focus. >> how does courtney get that gig in vegas and you're here talking options? >> come on. i wouldn't trade this assignment for anything. >> we don't believe you. >> what's your pick in the casino? >> i made an ill-advised pick. wynn i thought the shareholders suing them for more transparency
and other issues. i thought that was holding it back. but they missed. and the big as we said. stock's down 5% and can't get going. that to me is troubling. lvs trading at 52-week highs. a better bechlt >> this weekend is all about the super bowl. tonight is no exception. darren sits down with patriots owner robert kraft and steve tish to break down what a win means to the franchise. many more surprises. that's tonight at 7:00 p.m. eastern on the nbc sports network. and tune into nbc sunday to catch super bowl xlvi as the giants takes on the pats. live coverage kicks off at noon. time for the final call. >> god on the side of the quarterback married to gisele. >> i like vix calls here. >> i think still a head share. cheap. >> don't forget. money in motion is up next.